H&R Block Expands Its Tax Base

Electronic filing delivers the boost that diversification didn't

Henry W. Bloch has led a charmed life. The tax-preparation outfit that he co-founded in 1955 with his brother, Richard, in a Kansas City (Mo.) second-story office now rules the business. H&R Block Inc.'s 9,000-odd outlets handle roughly 14 million tax returns a year worldwide and have helped the $1.1 billion company deliver a return on equity of 27% and record earnings in all but one of its 36 years. Even so, Bloch has spent more than a decade diversifying into everything from computer data bases to legal services. He figured his maturing tax business would inevitably lose its oomph.

Bloch, 68, has had decidedly mixed results in finding hot new businesses. So where has the company discovered its most exciting growth prospect? Right in the supposedly moribund tax business beyond which Bloch has been trying so mightily to diversify. It's all thanks to electronic tax filing. "Electronic filing has brought a renaissance to the tax-preparation business," says Thomas M. Bloch, the 37-year-old scion being groomed to succeed his father, Henry.

CASH-HUNGRY. The company's Rapid Refund program, set up soon after the Internal Revenue Service approved electronic filings in 1986, has meant an avalanche of new business at H&R Block. Most Rapid Refund customers receive a loan equal to the amount of their tax refund from one of four banks a few days after electronically filing their returns. If no problems arise concerning the return, the IRS sends the actual refund directly to the bank, paying off the loan, in about two weeks. Meanwhile, Block collects a bank fee of about $29 to process the early refund, plus up to $25 for electronic filing, in addition to its regular tax-preparation fee of about $50 per return.

During these lean economic times, cash-hungry taxpayers have flocked to H&R Block. From Jan. 1 to Mar. 15, the number of electronic filings handled by its offices soared 74%, to 4.3 million returns. That should help push Block's earnings up 12%, to $138 million, this year on sales of $1.19 billion (chart). While rivals such as Jackson-Hewitt Inc. have also started offering electronic filing, they lack Block's reach and financial might. Block now controls about 65% of the electronic filing market.

And it's a business with a lot of growth potential. Hoping to shrink its own labor costs and reduce errors, the IRS would like to see 35 million returns--or about one-third of the annual total--filed electronically by the mid-1990s, up from about 8% now. Another encouraging sign is Block's experience in Canada, where it has offered speedy refunds for five years. Some 40% of its Canadian returns use the refund service.

Block is looking for other electronically inspired innovations. In New England, it's testing an electronic service for taxpayers who owe money to Uncle Sam. Why would anyone be in a rush to pay? Simply this: Balances due the IRS may be paid by credit card if filed electronically.

It's a good thing Henry Bloch's core tax-preparation business suddenly looks so healthy, because his efforts to diversify haven't always brought happy returns. Consider the company's 1985 purchase of Path Management Industries Inc., which conducts one-day management seminars. A 1988 postal-rate hike sent its direct-marketing costs soaring, while the recession has hurt business. In late December, Block sold Path for $20 million--42% below its $35 million purchase price.

NO CHEMISTRY. Another disappointment came when Bloch moved into legal services. Back in 1980, Block set up a management company to operate the Hyatt Legal Services chain founded by Ohio attorney and entrepreneur Joel Hyatt. The link between tax and legal services seemed like a natural. But the synergies never materialized: Hyatt offices that were joined to Block offices didn't generate any more revenues than did freestanding ones. In 1987, Block sold its 80% share of the company, Block Management Co., back to Joel Hyatt and private investors.

Henry Bloch makes no apologies for such duds. "We've been very careful in selecting the right size companies, so that if it doesn't work out--and so many acquisitions don't work out--it won't hurt us," he says. To his credit, though, Bloch struck pay dirt with the company's 1980 purchase of CompuServe Inc., then a small computer time-sharing company that later expanded into data-base services and software products. CompuServe revenues and earnings grew at 24.6% and 41.3% compound annual rates, respectively, between 1986 and 1990. And CompuServe's network is already transmitting most of Block's electronic tax filings to the IRS.

Meanwhile, with H&R Block's strong balance sheet and a $150 million war chest, both Henry and Thomas say they're still looking around for new acquisitions. But as their record so far shows, taxes are still one of the only two certainties around.

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